Citigroup Inc posted a $7.6 billion quarterly loss on Tuesday, but the bank's shares rose as declining loan losses raised hopes that the worst might soon be over.

Citigroup Chief Executive Vikram Pandit said loan performance outside of the United States looks strong, adding to investors' perception that the bank is recovering after a toxic assets forced it to seek three different U.S. government rescues.

They've crept out of the abyss like everyone else, said Henry Asher, president at Northstar Group, whose clients own Citi shares.

They have a long way to go before they start reporting significant profits, Asher added.

The bank is still facing significant headwinds. When asked about the outlook for loan losses on a conference call with analysts, Chief Executive Vikram Pandit said that losses could increase in the first quarter, and after that, the economy will be a key variable.

U.S. consumer credit remains an issue, Pandit said.

The bank said its quarterly loss narrowed to 33 cents a share, compared with a loss of $17.3 billion, or $3.40 a share, a year earlier.

The loss matched analysts' average estimate, according to Thomson Reuters I/B/E/S. Citigroup shares rose 11 cents, or 3.2 percent to $3.53 in early afternoon New York Stock Exchange trading.

Pandit is under heavy pressure to turn around Citigroup. He has been at Citi's helm for more than two years, during which the third-largest U.S. bank has posted nearly $30 billion of net losses.

Saudi Prince Alwaleed bin Talal, a major Citigroup shareholder, said in a recent television interview that Pandit must deliver in 2010.

Some investors were quick to note that the bank might not be turning around quickly. Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel, said: It's not an impressive quarter in my view. Investors are still worried about further credit losses ahead, as well as the impact of sweeping changes to banking regulation, McCormick said.

LOWER LOAN LOSSES

But there are still positive signs in credit trends at the bank. Citigroup set aside $8.2 billion in the quarter to cover credit losses and other items, compared with $12.7 billion in the 2008 fourth quarter. Loan losses were $7.14 billion, up 16 percent from a year earlier but down from $7.97 billion in the third quarter.

The bank's performance in Asia and Latin America were relatively strong -- regional consumer banking income from continuing operations was up in the two regions at Citicorp, where the bank houses businesses it intends to keep, compared to the third quarter. Income from continuing operations in Latin America regional consumer banking rose to $55 million, from $29 million in the third quarter and a loss of $4.22 billion in the fourth quarter of 2008.

Latin America and Asia was strong for investment banking too and the two regions contributed more than half of the income from continuing operations at Citicorp.

Like JPMorgan Chase & Co , Citigroup's investment banking revenue in 2009 helped offset deepening consumer credit losses.

But in the fourth quarter, Citigroup's securities and banking business, apart from the assets it is looking to shed, recorded a gain of $300 million because of a tax benefit. The business took a $518 million after-tax hit from correcting a prior accounting error linked to how Citigroup accounted for changes in the value of its liabilities.

Excluding changes in the value of Citigroup's liabilities, revenue in securities and banking fell $1.2 billion, hurt by lower stock and bond trading revenue.

MOVING ASSETS OVER

Citigroup is the second major bank to report fourth-quarter results, following JPMorgan. Bank of America Corp , the largest U.S. bank, and Wells Fargo & Co are due to report on Wednesday.

In a sign that some asset prices are recovering, Chief Financial Officer John Gerspach told analysts the bank is transferring $61 billion in assets to Citicorp from Citi Holdings, the bad bank created to wind down troubled assets.

Part of that shift is because the bank moved some fairly high-quality assets into a pool that was guaranteed by the government against excessive loss. With that guarantee now over, the bank can move the assets back to its Citicorp unit, where it keeps assets in its main businesses.

Citigroup ended that guarantee late last year, when it also repaid the government $20 billion and sold $20.5 billion of stock and convertible bonds.

Ending the guarantee and repaying the United States should bring less government oversight in areas such as compensation, but it came at a cost of nearly $6.2 billion, as the bank bought back securities from the government at a higher price than their value on Citi's books.

Citi was forced to sell shares at $3.15 apiece, well below their level before the bank announced a share sale and below the $3.25 price at which the government bought its shares. The low sale price forced the government to delay selling off a portion of its stake in the bank.

The government still owns 7.7 billion Citigroup shares, worth about $26 billion at current market prices and equal to a little more than a quarter of the bank's outstanding shares.

Citigroup shares fell more than 50 percent in 2009, while the KBW Bank index <.BKX>, a broader measure of banks, dropped just 3.6 percent.

(Reporting by Dan Wilchins; Additional reporting by Clare Baldwin and Elinor Comlay; editing by Gerald E. McCormick, Matthew Lewis and Andre Grenon)

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